Constellation Brands Inc (NYSE:STZ): Time For A Financial Health Check

Investors pursuing a solid, dependable stock investment can often be led to Constellation Brands Inc (NYSE:STZ), a large-cap worth US$43.0b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. I will provide an overview of Constellation Brands’s financial liquidity and leverage to give you an idea of Constellation Brands’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into STZ here.

View our latest analysis for Constellation Brands

How much cash does STZ generate through its operations?

STZ has built up its total debt levels in the last twelve months, from US$8.9b to US$9.9b – this includes both the current and long-term debt. With this rise in debt, STZ’s cash and short-term investments stands at US$209m for investing into the business. On top of this, STZ has generated US$2.2b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 22%, signalling that STZ’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In STZ’s case, it is able to generate 0.22x cash from its debt capital.

Can STZ pay its short-term liabilities?

At the current liabilities level of US$2.2b liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$3.6b, leading to a 1.66x current account ratio. Generally, for Beverage companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:STZ Historical Debt October 17th 18
NYSE:STZ Historical Debt October 17th 18

Does STZ face the risk of succumbing to its debt-load?

STZ is a relatively highly levered company with a debt-to-equity of 86%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can test if STZ’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In STZ’s case, the ratio of 7.44x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like STZ are considered a risk-averse investment.

Next Steps:

STZ’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure STZ has company-specific issues impacting its capital structure decisions. You should continue to research Constellation Brands to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for STZ’s future growth? Take a look at our free research report of analyst consensus for STZ’s outlook.
  2. Valuation: What is STZ worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether STZ is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.